Palo Alto's plan to give the city's water customers a rare reprieve from rising rates has been jeopardized by an unexpected spike in the cost of replacing aged mains, according to Utilities Department officials.
Now, officials are considering raising rates by 4 percent in November, an increase that they say would allow expected future rate hikes to be relatively small. The recommendation, which was presented to the Utilities Advisory Commission on March 26 and which the City Council's Finance Committee will consider Tuesday night, was a departure from the department's original plan to keep all utility rates steady in fiscal year 2015, which begins July 1.
Jon Abendschein, a senior resource planner at the Utilities Department, said the new recommendation to raise rates in the fall was driven by several "uncertainties" that have recently emerged relating to capital improvements. Bids for two major water-main-replacement projects have come back much higher than expected, he said. And costs for work on the city's 25-year-old water-main replacement program have generally gone up because of a hotter construction climate in an improved economy, he said. At the same time, the city is now using pipes with larger diameters because of fire code regulations and is switching to HDPE (high density polyethylene) pipes, which he said have a lower life-cycle cost but a higher upfront cost.
Because of the various cost increases, Abendschein said staff felt it was prudent to raise water rates by 4 percent on Nov. 1.
Staff is also uncertain about the scope of the city's next water-main-replacement program, which typically occurs in a 25-year cycle. The department has commissioned a major study to analyze the water utility's capital-improvement program. Initially slated for completion in 2016, the deadline has been moved to the end of this year.
"If it had just been one source of uncertainty or maybe even two, I think we may have been able to proceed with a zero percent increase, but with all the uncertainties that have started to add up over the last month or so, we think it's prudent to do a 4 percent rate increase this year," Abendschein told the commission.
Utilities Director Valerie Fong said staff is considering the proposed water-rate increase in the context of an overall utilities bill. Electric and gas rates would remain flat in the coming year, she noted. However, the city also plans to raise wastewater rates by 4 percent in conjunction with the water-rate increase. This would mitigate increases in future years, Abendschein said. Right now, the city estimates that wastewater rates would have to be raised by 6 to 7 percent in the three years after this one to pay for various planned improvements at the Regional Water Quality Control Plant. If the city raises them by 4 percent this year, future increases would be around 4 to 5 percent.
Fong also noted that the water rate increase would kick in after the summer months, when irrigation costs are higher.
"It has a nominal bill impact for this fiscal year but also helps mitigate bill impacts going forward, when we have to raise rates for the other utilities," Fong said.
The utilities commission wasn't sold on these arguments. Several members said they felt uncertainty isn't a good enough reason to further raise water bills that are already some of the largest in the region. The city has recently completed two studies evaluating the city's water rates; each pointed to the fact that Palo Alto has older infrastructure and "higher levels of capital investment and operations and maintenance expense as a result," according to a Utilities Department report.
The city raised water rates by 7 percent last year, largely to pay for for the rising cost of water supply. The city's water provider, the San Francisco Public Utilities Commission, is also now in the midst of a $4.6-billion effort to upgrade the Hetch Hetchy system. All agencies that draw water from the system are chipping in for the repair costs.
At that time, the average water bill in Palo Alto came in at about $72 a month, about 24 percent higher than in surrounding cities (Menlo Park, where bills were slightly higher, was an exception).
Given the many years of rising water rates, utility commissioners said they were pleased to learn in February that they would finally have a year in which rates can remain flat. They were less thrilled to learn about the latest 4-percent increase proposal.
Commissioner Garth Hall said the city doesn't have enough information yet to make a credible argument for increasing water rates further.
"I think we've got a very big burden of demonstrating to our ratepayers that we have understood and can explain why we're higher," Hall said. "We're not there yet."
Commissioner Steve Eglash agreed, saying he is worried about "the appearance of bringing in money when we don't yet know what we need it for." He proposed having no rate increases and adjusting rates as needed in the future, when the city has more information about the capital-improvement costs.
The commission voted 4-1 to accept Eglash's proposal. John Melton, the sole dissenter, (Asher Waldfogel and Audrey Chang were absent), said he would prefer to just leave the number blank until the city has a better idea of what the costs would be. The decision over rates should be deferred until the city has more data about construction costs.
"It seems to me that this is just another guess and is likely to change in three months," Melton said.